Seventh Generation's Jeffrey Hollender on How to Forecast

In 1988, when Seventh Generation launched in Burlington, Vermont, going green was nowhere to be found in the business vernacular. But over the next two decades, co-founder Jeffrey Hollender expanded the company -- which makes environmentally friendly household products such as diapers, laundry detergent, and dishwashing liquid -- from a tiny mail-order business into a $150 million operation. Seventh Generation has 112 employees, and its products can be found on the shelves of thousands of stores across the country.

During these difficult economic times, how does one forecast future demand with any type of accuracy?

Marge ClarkCEONature's Gift, Madison, Tennessee

When you go several years without a major disruption to the economy, you can forget what it's like to be faced with this kind of economic unpredictability. It takes a different mindset to run a business in a time like this. Instead of just looking forward, you've got to take a step back.

At Seventh Generation, for example, we've recently had eight years of extraordinary growth. During that time, we put most of our energy into generating more sales by seeking out new distribution channels, expanding into more supermarkets, and adding new products. But at a time like this, you can't just assume sales will grow at a regular pace. You need to take an item-by-item look at what's selling and what's not and who's buying and who's not.

It's also important to have more frequent and detailed conversations with your customers. The conversations need to be centered on more than just selling. You want to say, "Hey, what's going on with your business? What's going on with cash flow? Help me understand so I can plan for myself and continue to help you."

These sorts of conversations save you from jumping to the wrong conclusions. For example, one of the first things to happen when the economy slows down is that everyone wants to reduce inventory to conserve cash. But some of your customers might just be making temporary reductions in inventory. So, it could look like sales are slowing, when really the customer has decided to order five cases of a product twice a year rather than 10 cases at one time. If you don't know this, the first time you see the reduced order, you'll think sales are declining, and that could throw off your forecast.

You may also want to consider pushing your annual forecast back to later in the year. We used to do our forecast in August but now have pushed that all the way back to November. And in the past six months, we've created a new forecast almost monthly. Creating that many new forecasts can take a lot of time, but sometimes it's necessary. In the end, you don't want to run a business off of a forecast you no longer have confidence in.